Profit-taking lifts the US dollar

Choppy waters ahead for currencies

The US dollar finally found some footing overnight, carving out modest gains versus G-10 currencies. That does not mark a change in sentiment though, with the move higher by the greenback looking decidedly profit-taking-driven in nature. The US dollar index edged 0.08% higher to 93.73 but remains in a robust technical downtrend.

The EUR/USD pair retreated from 1.1800 overnight, closing down 0.30% at 1.1730. Having led the US dollar sell-off, the single currency is somewhat of a bellwether at the moment. A close below 1.1700 suggests a deeper correction to the low 1.1600’s could occur. However, even a fall to those levels will still leave the single currency comfortably in an uptrend. A similar pattern was followed by most of the G-10 set-up and regional Asian currencies overnight. Still, the underlying theme is that all could materially correct lower versus the US dollar but remain comfortably in technical up-trends.

One notable exception was the British pound. GBP/USD shrugged off the malaise seen elsewhere, rising 0.40% to 1.2930. Selling of the EUR/GBP cross appears to be the main culprit, with the resurgence of Covid-19 in Europe causing frayed nerves for Eurozone investors.

Currency markets could well spend the next couple of days in choppy range trading, consolidating recent gains versus the US dollar. It is crucial to distinguish the nuances of consolidating markets from turns in sentiment and momentum, though. With the Fed likely to be uber-dovish tonight, and US real yields remaining in negative territory, the underlying factors driving the US dollar rotation remain firmly in place. Only disappointing big-tech earnings have the potential to upset the apple cart. (no pun intended)

The data calendar across Asia and Europe is strictly second-tier today, with the main event being the FOMC rate decision and accompanying statements this evening. As I have stated, the Federal Reserve will do nothing to rock the boat, so the Fed decision is unlikely to stir up the currency markets.

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